Alberta oil sands: Economic boondoggle or engine of the Canadian economy?

oil sands

Oil sands SAGD well.

2016 to 2036 Alberta govt will receive $676 billion from oil sands royalties, $245 billion from taxes

To an Albertan, suggesting the oil sands might be an “economic boondoggle” is like arguing the Earth is flat – evidence to the contrary is just too overwhelming. But on May 2 I will be debating Green Party of Canada representative Gordon Cornwall at the Vancouver Public Library on exactly that issue. Albertans will be surprised that many British Columbians share Cornwall’s view about the oil sands, which is unfortunate given the public debate about to erupt around the construction of the Trans Mountain Expansion pipeline.

oil sands“Economic benefits from oil sands development can be measured by the jobs it creates, the goods and services it purchases from other businesses, and the royalties and taxes paid to governments,” according to a 2014 IHS CERA study entitled, Oil Sands Economic Benefits: Today and in the future.

While those benefits are going to be substantial for both Alberta, the Canadian government, and other provinces, Albertans will have to adjust their economic expectations going forward.

The Great Boom is not coming back, according to Prof. Robert Skinner, executive fellow, The School of Public Policy, University of Calgary.

“The build and ‘new entrant’ boom of 2004 through 2014 (with the slight lull during the 2008/09 financial crash) and continuing today with the legacy projects, created excessive competition for skilled labour, materials, office headquarters space, fabrication shops, work camp facilities and infrastructure build,” he said in response to emailed questions.

oil sands“It placed a lot of pressure on regulators and the ‘soft’ skill industry–in law firms, community consultation and environmental assessment consultancies—and even HQ in-house massage therapists.  Unit costs/bbl continued to increase while revenue/unit had levelled off.  This was bound to end in tears.”

Skinner expects the focus on construction will be replaced by more emphasis on maintenance and repair.

“The legacy projects under construction and due for completion by 2020 are carrying some of the momentum but once they are done, we will be left with a still significant annual maintenance, repair and operations (MRO) expenditure to keep all the kit put in place during the boom—some $200 billion worth–ticking over,” writes Skinner.

“Like any manufacturing industry, it needs daily maintenance.  Wells need to be replaced and processing facilities have to be repaired and kept in safe operating condition.”

oil sandsOil sands output is forecast to grow 1.5 million b/d by 2030, bringing total production up to almost 4 million b/d. But this time, existing (brownfield) facilities will be expanded instead of building all new plants, which require new infrastructure, take much longer, and require more capital.

“IHS expects that over 80% of future activity in our outlook will be underpinned by expansions of existing facilities – these being well understood, quicker to first oil, and cheaper to construct. This all equates to less risk at a lower cost,” said Kevin Birn of IHS Markit. 

The oil sands are expanding and production costs are coming down. Does that trend represent a boon or a boondoggle for the Canadian economy?

The data and charts below were taken from reports by the Canadian Energy Research Institute.

Royalties and taxes

Figure 3.14 displays historical and forecast (2016 to 2036) oil sands royalties on an annual and cumulative basis, in 2015 dollars. Annual royalty revenues amount to C$61.5 billion by 2036, and cumulatively C$676 billion will be collected over the 20-year window.

oil sandsAs a result of capital spending cuts and low prices, royalties will continue to decrease from the all-time high in 2014 throughout 2015 and 2016. Over the next five years from 2016 to 2021, as oil prices are expected to recover, royalty revenues will add up to $55 billion (cumulatively), all other things being equal.

Over the forecast period, oil sands-related taxes (indirect, personal and corporate) directed to all levels of government will total $750 billion (2014$Cdn).

The Canadian Federal government will receive $464 billion with 89 percent (or $417 billion) sourced from Alberta-based companies.

Canadian provincial governments will receive $286 billion with 85 percent (or $245 billion) attributable to the Alberta government. – Canadian Oil Sands Supply Costs and Development Projects (2015-2035), CERI, P. 45

Jobs

Employment is forecast to grow by approximately 6 percent, or about 3,400 jobs, from an estimated 63,800 in 2016 to 67,200 in 2020.

Jobs in on-site construction and module fabrication will decline by 6,500 but will be offset by an increased requirement for 9,900 workers to support ongoing operations, maintenance and turnaround activities. – Canadian Oil Sands Supply Costs and Development Projects (2016-2036). P. 47

Economic benefits

Overall contribution of the Canadian oil and gas industry to the Canadian GDP amounted to $135 billion in 2015 (or nearly 10 percent share of total Canadian GDP), which is down by 3.4 percent from 2014.

Oil sands represents a significant portion of the sector, and it is projected it will contribute over $4 trillion to the Canadian economy over the next twenty years. – Canadian Oil Sands Supply Costs and Development Projects (2016-2036). P. 47

Conclusion

As the CERI report points out, all the tax and royalty revenue, jobs created, and economic impacts are estimates only. Oil prices could drop off a cliff again or some other cataclysmic economic event could render them moot.

But the numbers are so large that the estimates can be off significantly and the economic impacts of the Alberta oil sands would still be huge.

Let’s not forget that the estimates could also be conservative.

In any event, the numbers put to rest any notion that the oil sands are a boondoggle. They do suggest the oil sands may be a bigger boon to Alberta, the Canadian economy, and federal government than most people understand.

Especially outside Alberta.

Posted in: Markham on Energy

2 Comments on "Alberta oil sands: Economic boondoggle or engine of the Canadian economy?"

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  1. Don Jaque says:

    All of what you have said here is true. It is what is not said that is the issue.

    No mention of the lack of regulation and accountability – the regulatory ‘pass’ given the corporations;

    What of the impact on health of people in the region – not even proper studies commissioned to study that;
    No mention of the devastation to the land and the value of the forests scraped away;
    Overlooks the loss of wildlife habitat, including endangered species;
    What of down stream impact including poisoning the river water and drawing down river levels – or massive tailings ponds sitting on the banks of a major river, leaking into it;

    Polluting or poisoning aquifers by steam injection systems or by tailings ponds with no barrier (impermeable membrane) on the bottom;

    ….And more –
    What of those costly legacies worth $billions,left for future generations to pay for?

    All that would cut deeply into your profit model, if acknowledged and factored in. Sadly, supporters of massive scale industrial developments always seem to conveniently overlook such things.

    For the record I am a journalist who lives downstream of the oilsands development and has reported on them for over 35 years.
    I support oilsands development if done right, on a limited scale, but the shoddy and far-too-big-too-fast way they have been (are) allowed to happen is reprehensible.

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